Energy

In an article published in the journals Oil, Gas & Energy Law Intelligence (OGEL) and Transnational Dispute Management (TDM), Julia E. Sullivan, NERA Managing Director Dr. Jeff D. Makholm, and Berdyansk State University Law School Professor Dmitriy Kamensky outline the interdependent nature of the relationship between Ukraine and Russia and natural gas trade through their respective companies Naftogaz and Gazprom.

In February 2018, an arbitral tribunal in Stockholm, Sweden, issued its final award in an epic, four-year legal battle between Ukraine’s Naftogaz and Russia’s Gazprom. The total claims were reported most consistently as $44 billion by Gazprom and $26.6 billion by Naftogaz, leading to suggestions that this was the largest arbitration case ever. In a stunning legal victory for Ukraine, the tribunal ordered Gazprom to pay Naftogaz $2.56 billion. In retaliation, Gazprom cut off essential natural gas supplies to Ukraine, causing a temporary emergency while Naftogaz lined up alternative supplies.

Gazprom’s retaliatory gas cut-off was consistent with Russia’s long history of using its vast energy resources to carry out a sanctions and incentives regime against Ukraine, granting steep price discounts and generous credit terms to administrations it considers cooperative while punishing administrations that pursue more nationalistic policies. Since 2014, Russia’s energy sanctions have been combined with military operations to directly threaten the political independence and territorial integrity of Ukraine.

The authors conclude that Russia’s aggressive use of its dominant energy position to achieve political objectives in Ukraine illustrates Europe’s increasing vulnerability to Russian energy dominance. Given that the European Union (EU) relies upon Russia for close to 40% of the gas it consumes, the broader implications are sobering. Like Ukraine, the EU and its member states may be forced to develop competitive supply alternatives to mitigate Russia’s growing leverage.

This paper is part of the joint OGEL & TDM Special Issue with ArbitralWomen on “Strategic Considerations in Energy Disputes.” To request a copy, email juliasullivan@jeslaw.us

On December 23, 2015, a well-planned, perfectly-synchronized, brilliantly executed cyber-attack caused a six-hour black-out for hundreds of thousands of customers in and around Ukraine’s capital city of Kiev. It was the first documented case of cyber-intruders bringing down a power grid.

The attack methodology, tactics, techniques, and procedures that were successfully deployed in Ukraine could be deployed against infrastructures in the U.S. and around the world. While there have been no known cases of cyber-terrorism causing power outages in the U.S., a series of equipment failures and unexplained attacks have exposed the vulnerabilities of the U.S. electrical grid.

Small power production resources originally designed to lower the costs of energy and eliminate harmful emissions could improve public access to power during a cyber-attack or other emergency. The resilience and security of supply implications have become increasingly relevant in evaluating the costs and benefits of distributed energy resources and microgrids.

The Federal Energy Regulatory Commission (“FERC”) shares jurisdiction with the states over matters that fundamentally affect investment in critical energy infrastructure. In general, FERC’s policies have favored investment in assets that have the lowest short-term incremental cost, while state policies have tended to take a longer-term view and consider a variety of different factors, including fuel diversity, environmental impacts such as global warming emissions, security and sustainability of supply, economic development, stability of retail rates, and other public interest considerations.

Significant conflicts between FERC policies and state priorities have generally been resolved in favor of FERC by the federal courts. Courts have cited the Supremacy Clause of the U.S. Constitution, which requires state policies to yield in areas where FERC has exclusive jurisdiction. However, federal law also preserves important responsibilities to the states.

To the extent that federal policy could impede the accomplishment of the states’ legitimate objectives in areas traditionally reserved to them, a collaborative approach should be adopted. The November 2014 joint technical conference between FERC and the New York Public Service Commission (“NYPSC”) to discuss issues of mutual interest and concern regarding wholesale markets and energy infrastructure in New York is a good example of the type of collaboration that may become increasingly necessary to reconcile sometimes conflicting federal and state regulatory priorities, provide market participants a reasonable degree of market stability, and help avoid contentious litigation.

For more information, see Julia Sullivan, The Intersection of Federally Regulated Power Markets and State Energy and Environmental Goals, 26 Fordham Envtl. L. Rev. 474 (2015) (available at https://ir.lawnet.fordham.edu/elr/vol26/iss3/5/)

The term “distributed generation” generally refers to small-scale generating facilities installed on an end user’s side of the utility meter and interconnected to the utility’s low-voltage distribution system. Distributed generation usually is designed to meet an end user’s on-site energy needs, often with power generated from solar, wind, or biogas resources or cogeneration technology. While each distributed generation investment is unique and requires careful, fact-specific due diligence, a well-structured investment can create opportunities for end users to lower their energy bills, reduce energy price volatility, earn tax benefits, improve electric service reliability and create product differentiation through environmentally conscious decision-making.